Property owners often have many questions about lease renewals. When should they ask their tenants to renew? Should they raise the rent, and by how much? Renewing a tenant’s lease can save you a lot of money and time. You won’t have to spend money on vacancy costs or waste time marketing your property.
Sometimes you might not want your tenant to renew, especially if you have issues with them paying rent on time. In this article, we’ll go over everything you’d want to know about renewing a lease and what is involved in the process.
Benefits to Renewing a Lease
Renewing the lease with your current tenants has a number of benefits. For one, you won’t have to worry about finding a new tenant. Whether you have a property manager or are managing the home yourself, replacing a tenant can be a time consuming process, especially depending on the time of year.
This is especially beneficial if you have a great tenant. It’s reassuring to know that you’re able to keep the tenant that pays on time and takes care of your home. When you have to replace them, you run the risk of getting someone that might not be so courteous.
Current tenants will also know the rules of the community and your home. If you have plants that are watered by your tenants, you won't have to worry about enforcing that with new tenants. If the property is part of an HOA or other community, you won't have to inform the tenants of these rules or obligations.
Another major factor in lease renewals is the cost. Vacancies can cost an owner anywhere from a couple hundred dollars to a couple thousand. This includes a leasing fee (if you work with a property manager), repairs, marketing, etc. Not to mention that during the vacancy period, you won’t have any rent coming in.
By renewing your tenant’s lease, you save all that money you would have spent to get your property re-rented.
How to Renew the Lease
If the owner wants to offer a lease renewal, the first step is to decide on the rent increase. We recommend a 2-5% increase to keep your home just below market. The reasoning for this is so your tenant has the incentive to stay. If your home’s rent increase too high above market, they’ll likely look for another place that has more upgrades for a similar price.
Once you (or your property manager) decides what the new rent price will be, you should inform the tenant. This should be done at least 60 days prior to their lease expiration. At Good Life, we begin discussing a lease renewal with the property owner 90 days priors to the lease expiration. That gives them plenty of time to make a decision and if they choose to vacate, you’ll have time to fill the vacancy.
Send the tenants a letter stating that their lease is expiring and they have until said date to resign the new lease. Oftentimes the tenant will try to negotiate the price, especially depending on what the increase is. It’s up to the owner on whether or not they will lower the rent or will stand by their initial offer.
Keep in mind, agreeing to negotiate the renewal offer is not always a bad thing. Say the tenant wants a $30 increase instead of a $50 increase. While on the surface you might think this isn’t worth it, the cost of a turnover is much higher than the $20 a month you’ll be losing. Click the button below for our average turnover cost flyer!
Reasons You Might Not Renew a Lease
If your tenant has lived in the property for less than 2 years, you don’t need a reason to terminate their lease. Simply mail them a letter and inform them that their lease is expiring on said date and they must be moved out by the end of that day. If they have lived in the residence for less than one year, you can give them a 30-day notice, but best practice is 60.
If you have a property manager, they’ll be handling lease renewals and in this case will likely recommend terminating the tenant if they feel it’s the right decision. While keeping a tenant is beneficial for keeping vacancy costs down, it’s best to take the advice of the manager if they feel they tenant will cause you problems and cost you money in the future. Typically they will strongly recommend a termination if the tenants become a liability.
Other reasons a termination might be a better option is if the owner wants to do extensive upgrades to the home that would prevent the tenants from living there.
However, If the tenant has lived in the property for over 2 years in San Diego, it falls under the just cause eviction law. This means that your reason for terminating a lease must be one of the following:
- Nonpayment of rent
- Violation of obligations of tenancy
- Illegal use
- Refusal to renew lease
- Refusal to provide access
- Correction of violations
- Withdrawal of residential rental structure from the rental market
- Owner or relative occupancy
In this case, when you send the letter notifying the tenant of the termination, you must state the reason for doing so and give them a 60 day notice. For more information on the just cause eviction law, check out this document from sandiego.gov.
We hope you learned some valuable information about lease renewals. For more tips on being a successful landlord, download our free guide below.